2006 Career and Compensation Survey

Gary Ellis's long-term commitment to broadening his skills and experience as a finance professional was rewarded a year ago when he was named senior vice president and CFO of Minneapolis-based Medtronic. But fewer talented finance managers are choosing to emulate his steady, 16-year rise through the ranks of the medical technology company's finance function. Lucrative opportunities for short-term rewards in the corporate world are tempting these managers to forgo crucial development experiences, suggest the results of Business Finance's annual Finance Executive Career & Compensation Survey.

"People are jumping ship from the top accounting firms faster than they did before," says Neil S. Lebovits, president and COO of Ajilon Finance, a firm that provides managed services for professionalstaffing in Saddle Brook, N.J. And fewer CPAs enter the client side through the internal audit department, which traditionally served as a proving ground where new finance professionals learned the company, established relationships throughout the organization and gained management training.

"A lot of money is being offered for other finance positions that are higher in demand," Lebovits points out. "They don't need that internal-audit entry point when so many glamorous companies are offering wonderful jobs. Many younger finance professionals are looking more at the short-term dollars than at what's best for their long-term career prospects." Those high-paying jobs tend to be compliance-related -- anything with internal controls, compliance or Sarbanes-Oxley in the title.

The survey results indicate that whether finance executives and professionals choose short- or long-term career tracks, their prospects look promising: Pay continues to rise (see graph 1 below), and the value of both the CPA and the MBA also continues to increase. The real-world experiences and business processes related to each designation, such as financial reporting for the CPA and M&As and strategic planning for the MBA, only boost their worth. Revenue growth is a top priority, and businesses seem to be hungrier than ever for the expertise that resides in finance.

Twenty-four percent of CFOs and 22 percent of all survey respondents report that their total compensation packages increased by more than 10 percent from 2004 to 2005. Only 3 percent of all participants saw their salaries decline between 2004 and 2005 (see graph 3 below). Even though the group polled is a relatively conservative bunch when it comes to forecasting, they remain upbeat about future pay increases: Half of all respondents expect that their total compensation will rise by 5 percent or more this year compared with 2005 (see graph 2 on previous page).

Dangers of Demand Cycles

Lebovits routinely cautions the finance professionals Ajilon works with to step back from what he describes as the current "demand cycle," which is particularly strong for the compliance and technical accounting-related positions that are attracting professionals. Finance analysts, accounting managers or positions at similar levels may be better served over the long term by passing on a new job in a currently hot area (such as internal controls manager), even if it pays $15,000 or more per year above their current positions.

Suppose a manager earning $70,000 has two offers on the table: The first pays $120,000 per year and focuses on a specific compliance task; the second provides a modest bump to $85,000 per year, but will provide much greater exposure to the rest of the business. The manager should consider more than money, advises Lebovits, because the higher-paying job may slow the manager's rise in the finance function and dampen the earning potential over the long term.

Just ask Ellis, who joined Medtronic in 1989 as assistant corporate controller. He had previously worked at PriceWaterhouse, where he managed the Medtronic audit for nearly 10 years, among other responsibilities. Ellis progressed to vice president for Medtronic Europe in 1992 and was named vice president and corporate controller (responsible for the finance and accounting functions throughout Medtronic) in August 1994. Five years later, he added the corporate treasury functions to his area of responsibility and title. Ellis is currently responsible for treasury, tax controllership, internal audit, investor relations, corporate development and the company's global business solutions, which include quality, supply chain, facilities and all facets of information systems.

Ellis believes that the knowledge he accumulated about the entire business and the relationships he fostered outside of the finance function were crucial in his development as a CFO. "The most important responsibilities were working closely with the COO to understand and control all of our operating units," he says. "The CFO must have an excellent grasp of knowledge surrounding the business operations, and my role as controller/treasurer prepared me well. My time as VP finance of Medtronic's European operations was also critical in my development. I was also very involved in our strategic planning processes, acquisitions, financial analyst meetings and banking relationships."

Ellis also emphasizes the value of his public accounting experience, an area of his skill set that he has called on more frequently since the passage of the Sarbanes-Oxley Act. However, younger finance professionals who aspire to assume the CFO seat should avoid cashing in on the current demand for internal controls know-how if those opportunities stunt the strategic growth that finance's upper level also demands. "It's great to get into those areas, but you also need a plan to get into other areas," Lebovits explains. "Finance and accounting people are getting caught up in this compliance web. Ultimately, the real key is creating shareholder value. The person who is most well-rounded and who can be strategic will be the best candidate for the CFO and CEO positions."

Dollars and Drivers

Taking the career leap into the glamour jobs of the demand cycle signifies good times for finance professionals' pocketbooks. A range of factors appears to drive current compensation packages, as Paul Smith, CFO of 170 Systems Inc., a finance processes software provider in Bedford, Mass., confirms. He reports that 2005 treated the financial software provider well. "We had a healthy amount of growth, and my compensation plan [for 2006] is again tied in part to the financial results of the company," Smith explains. "So, I'm very focused on growth. There is also expectation that the growth is accurate, so my compensation is also tied to financial reporting accuracy."

A wide range of compensation drivers is also reflected in the survey results (see graph 4 below), which differ, predictably, between CFOs and the rest of the finance organization. Among CFOs, the top three most important drivers of current compensation are creating shareholder value; business and financial reporting, analysis and forecasting ­ the processes that comprise business performance management (BPM); and strategic planning, respectively.

The compensation levels of all non-CFO finance professionals, however, are primarily determined by their performance in different areas. Among all respondents, the top three most important drivers of current compensation are BPM, creating shareholder value, and accounting and auditing, which barely edges out governance and compliance for third place.

Internal controls monitoring and other Sarbanes-Oxley-related compliance concerns appear to have faded from the CFO's slate -- only 8 percent of CFOs identify those activities as the most important driver of their current compensation -- but they remain a primary and influential issue among other finance positions. Managers and junior finance executives also appear to understand what they need to do if they are to ascend to CFO: The largest percentage of all respondents identify creating shareholder value as the most important driver of their future compensation.

Sarbanes-savvy midlevel finance professionals are cashing in on their skills and exposure to compliance work. Lebovits says that internal auditors with three to four years of experience and IT skills "are worth their weight in gold." That's long been the trend, but the demand for specific auditing and accounting skills has spread beyond internal audit. Two years ago, all finance positions in Group Health Cooperative, a $2.5 billion Seattle-based nonprofit health care system received 15 percent to 20 percent salary increases. The bump was based on marketplace comparisons. Byron Stuck, the finance director for the company's Puget Sound region, which generates about $900 million in annual revenue, learned the pros and cons of the across-the-board boost. "The increase gave me a lot of happy campers," he says. "For seemingly little change in their role, some of my people jumped from $65,000 per year to $85,000 per year. They were saying, 'Wow, this is fun.' "

But recruiting and hiring have become less enjoyable for Stuck, and development has become, necessarily, more expensive. Four finance managers report directly to Stuck. Recently, two of the final three candidates for one of those positions dropped out of the hiring process, which began with 55 candidates, to accept other offers. "It's very difficult to find talented folks right now," he says, noting that he has invested more in training and development, in part to ensure that the top talent he brings in to the company remains on staff.

Not Enough Money?

Although the vast majority of finance professionals continue to enjoy sizeable increases in annual compensation, the survey indicates that almost half of all respondents -- and, surprisingly, 46 percent of CFOs -- believe that they are worth more (see graph 5 below). The reasons for the dissatisfaction again differ according to title. Most survey respondents who believe they are not compensated equitably say it's because the skills their jobs demand have expanded. CFOs say they're dissatisfied because the risks attached to their position have increased (see graph 6 below).

The top reason that all respondents give for deserving more money seems understandable and is supported by the tight labor market for finance and accounting professionals. Additional work usually translates to higher pay. When it does not, finance and accounting managers can certainly find more attractive offers elsewhere.

Smith agrees that the risks are greater. Just look, he says, at the finance executives who have received prison sentences for their on-the-job decisions in the past three years. "But I would not want to have an extremely high level of compensation to essentially gamble that the risks exist and I may well get in trouble," he explains. "I would prefer to have an adequate level of compensation. If I'm going to take on an increased level of risk, then in that role I need to have an increased level of authority and an increased level of partnership with the CEO to make sure that I can mitigate the risks. It doesn't do a lot of good to be paid $2 million a year and not be able to control the risks."

Blended vs. Binary Priorities

The 2003 Finance Executive Career and Compensation Survey suggested that cost cutting was more of a priority than revenue growth. But during the past two years, revenue growth edged ahead of cost cutting as a top priority for survey respondents. Those results don't surprise Mitchell Codkind, vice president, finance, for Philadelphia-based Primavera Systems Inc., a global project and portfolio management software company headquartered in Bala Cynwyd, Pa. He believes that the either/or focus on cost reduction or growth is a relic of the past. "I think those priorities used to be sort of binary," he explains. "You either focused on growing revenue and didn't worry too much about the profit impact, or you worried about cost structure. Now, you have to do both, which makes it interesting and incredibly challenging."

CFOs identify the following top priorities during the next 12 months: revenue growth, working on M&As, managing growth and cutting costs, respectively (see graph 7 below). As the first surge of Sarbanes-Oxley initiatives finally works its way into the business-process flow, more companies are focusing on growth. "M&A is really robust right now," notes Michele Heid, managing partner for the North American financial officers practice at Heidrick & Struggles, an executive search firm in Philadelphia. "That requires a different skill set."

For top CFOs with a broad set of skills, the shift in priorities simply means flexing different muscles. Lower in the finance ranks, however, compliance and control-related activities will remain a top priority during the coming year. "Compliance is nonending," remarks Lebovits. "We regularly conduct seminars for finance managers, and the general feedback is that everyone is in crisis and deadline mode, but the deadlines never end so the crisis never ends. Everyone thought there would be this huge wave, and then all of a sudden, it would completely die off. That didn't happen, and people are still working hard."

Survey respondents overall identify the following top priorities during the next 12 months: regulatory compliance, followed by improving financial reporting, growing revenue, and streamlining and outsourcing business processes, respectively (see graph 7). When the response "preparing better forecasts" is combined with "improving financial reporting," the resulting combination of BPM processes emerges as the top priority of respondents during the next year.

Smith understands why that is so. Revenue recognition has always been a problem, particularly in the software industry. Under Sarbanes-Oxley, that pressure has intensified, and Smith points out that it has also affected forecasting. "I need to be conservative not only in how I report the revenue," he says, "but I also need to make reasonable forecasts in terms of what revenue we can recognize so that we can hire the appropriate number of people to work within this company."

Roles and Reversals

Competing priorities can convey benefits as well as challenges. One advantage: Those needs cross functional boundaries and force finance executives to interact more frequently with other parts of the company. "I find that I'm being pulled more into the operations of the business, specifically the sales and marketing areas, where they are the drivers of the top line," explains Codkind. He has also sought out those experiences. The inclusion of the corporate IT function among his responsibilities gives Codkind an expansive view of the business and its needs. "Being responsible for IT gives me a unique opportunity to see and/or participate in all of the business initiatives that we are taking on because IT is almost always a component of those changes," he says. In this role, he sponsored the implementation of a new order-management system last year.

Debates we've reported in earlier surveys about the relative value of the CPA vs. the MBA and finance executives' focus on transactions or strategy increasingly seem less important: Both degrees are worthwhile, and the most valuable finance executives play a key role in overseeing transactions as well as shaping and supporting strategy.

The CPA certification's perceived value has undoubtedly increased since the passage of Sarbanes-Oxley, and it shows no signs of diminishing -- good news for the 65 percent of CFOs responding to this year's survey who are AICPA members. That would seem to suggest that any preferences for MBA CFOs over CPA CFOs during the go-go late '90s represent more of an exception than a long-term trend.

Medtronic's Ellis says his "critical business judgment and ability to scrutinize complicated activities was developed in public accounting." He has never felt that he had the time to return to school for an MBA during his career, but he certainly earned a real-world MBA, and he encourages younger finance professionals to earn their MBA because it helps develop "new skills and critical business judgment" in a systematic way.

Charles Eldridge, managing director of the financial officers practice at Atlanta-based executive search firm Korn/Ferry International, asks Wall Street analysts regularly for their impression of these credentials. If analysts are rating a company that has a CFO with a CPA or a CFO without one, regardless of whether the CFO has an MBA, "they say that they'd always prefer the CPA," Eldridge reports. "It gives them an added comfort level. If you don't have the CPA, you have to earn the respect of the Street. How long does that take -- two months, three months, nine months? I'm not sure, but I don't see it going away in the short term."

As in all previous Finance Executive Career & Compensation surveys, the CFOs, finance executives and finance managers who describe their role as more strategic than transactional are better compensated than those who focus less on strategy. That finding jibes with the perspective of CEO James Quigley, whose New York City-based firm, Deloitte & Touche USA LLP, works directly with many of the world's top CFOs. "I believe that in many cases, the CFO has become the number two position in the company," says Quigley. During his 30 years of public accounting experience, Quigley has watched the CFO's role evolve from one of stewardship to strategy. The accounting, financial reporting and compliance-related responsibilities are increasingly handled by the chief accounting officer (CAO) in large companies, he believes. "We've seen the CFO's role shift over time," Quigley says. "The emphasis of the CFO is moving in the direction of this key player in the development and execution of strategy."

Step Outside the Finance Box

Earning both a CPA and an MBA can help propel finance professionals in a strategic direction, but it appears equally important to follow in the "extracurricular" footsteps of CFOs like Ellis and Smith. Kent Burns, a partner and top- producing recruiter in MRINetwork's Indianapolis-North franchise, regularly conducts CFO searches. He says companies want to hire CFOs who are "really a businessperson who functions in a finance environment."

During CFO searches, Burns looks for candidates who have stepped outside the traditional scope of corporate finance to contribute to their company. "I want to understand the degree to which they work cross-functionally with other leaders in the business," Burns notes. "How often are they paired up with operations or working with sales, R&D or product development to make initiatives happen?"

As Lebovits asserts, finance managers and executives should have a plan for broadening their experiences, relationships and skills. Before becoming a finance executive, Smith spent nearly nine years in public accounting, working at Ernst & Young with some 60 clients, including Boston Scientific and Reebok. "When you see that many different control environments, that many audits and that many finance and accounting departments, you learn a lot," he says.

Medtronic's Ellis worked closely with his predecessor, Robert Ryan, on an "individual development plan." The document is highly detailed and designed to meet the needs of the organization and the individual. "The plan we developed would provide me exposure to the board of directors, executive management and external stakeholders, but all objectives of this plan were designed to develop me as an individual, not specifically for the CFO role at Medtronic," Ellis explains. "The critical projects were related to strategic and tactical operating issues where I could develop my leadership and business knowledge."

The plan appears to have helped Ellis rise through corporate finance, largely by forging relationships outside of the function. That experience and the professional successes it has helped deliver have molded Ellis's priorities in his current role, which sound unequivocally strategic:

Hire the best people and develop them. "Throughout my career I have also looked to hire people who are more talented than myself and just give them room to grow and develop," he says.

Know your business. "You cannot be a strategic partner with your board or other management if you do not understand all aspects of the business," he insists.

Provide the vision to the organization. Ellis says he presents a vision to the business's employees "on where we want to go." But then, he says, he steps out of the way so that they can accomplish those objectives.

Is Ellis's patient, systematic approach to career decisions the only way to reach the CFO position? No. Although his career path certainly has paid dividends, there are always new ways to reach the top seat. In the current hiring environment, a large number of high-paying options happen to be available to a wide swath of finance professionals. The question is whether those short-term payouts also carry long-term risks.

Dollars can always be recouped, Lebovits says. Experience cannot.

Methodology

In all, 629 corporate finance professionals completed the 2006 Finance Executive Career & Compensation Survey online in December 2005 and January 2006. Many respondents qualify as seasoned; 43 percent boast 16 years or more of experience. Forty-six percent of respondents have worked for their current companies for five years or less.

Respondents include CFOs (9 percent); finance senior vice presidents, vice presidents and directors (17 percent); treasurers (2 percent); controllers (12 percent); and finance managers (12 percent). The remaining 48 percent of respondents consist of other manager and executive titles and staff positions. Fifty-four percent of respondents hail from companies with annual revenues of $1 billion or more, 15 percent work at $500 million to $999 million companies, and 31 percent work at $100 million to $499 million companies.

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